Howard Archer Rice Quotations

Following the higher-than-expected headline producer price inflation data for January... (Tuesday's data) is welcome reassurance that strong competitive pressures through the supply chain are still limiting the pass-through effects of high oil and energy prices.

For now at least, the Bank of England will be very wary that a trimming of interest rates could excessively stimulate the housing market and risk sending house prices markedly higher. It certainly further rules out a move today.

December survey evidence showing robust service sector activity, stronger retail sales and firmer house prices has temporarily at least alleviated some concern over the economy's softness and eased pressure on the MPC for an imminent cut in interest rates.

With consumer price inflation below the 2% target level in both December and January and clearly below the levels forecast by the Bank of England in their November quarterly inflation report, a near-term interest rate cut suddenly looks a very real possibility again.

While it is clearly premature to sound the all-clear on inflation, the October consumer prices data are largely reassuring for the Bank of England and boost hopes that inflation has peaked,

House prices are likely to remain relatively flat for an extended period,

The Bank of England will not be happy to see that manufacturers output prices rose at an increased rate in December, as it suggests that they could be stepping up their efforts to pass on their higher input costs despite intense domestic and international competition and relatively soft demand.

The Bank of England will be pleased to see that producer output prices remained largely contained in December, but less good news is the further sharp increase in input prices as gas prices soared.

The MPC could remain on the sidelines for some months to come as it monitors the strength of consumer spending and the housing market, and also looks to see if high oil and energy prices are feeding through to have second round inflationary effects.

This confirms that late in 2005 there was still no evidence that pay was starting to be pushed up by recently higher consumer price inflation and increasing energy bills.

The Nationwide data provides support for our long-held view that house prices will be unable to sustain sharp gains for some time to come.

The fall in headline annual producer output price inflation in March was primarily due to base effects reflecting the particularly sharp rise in producer prices a year ago as oil prices surged.

We believe house price increases will be relatively muted over the coming months, given affordability constraints, increased debt levels and muted earnings growth.

This increased housing market activity has clearly led to some recent firming in house prices, and there is undeniably a risk that prices could move sharply higher over the coming months.

The increase in inflation in August was primarily due to higher prices for fuel and some food items, while core consumer inflation actually edged back down to 1.7% after spiking up to 1.8% in July from 1.5% in June.

This is likely to reinforce the central bank's concern that any further trimming of interest rates could excessively stimulate the housing market and risk send housing prices markedly higher.

This is likely to put a floor under house prices, but we remain highly doubtful that house prices will move substantially higher on a sustained basis any time soon. If house prices start to accelerate markedly, we believe buyer interest will soon diminish, thereby keeping a lid on prices.

There is undeniably a growing risk that house prices could move markedly higher over the coming months. Indeed, this risk is clearly showing more prominently on the Bank of England's radar.

The climb in annual house price inflation to 2.5 per cent in November from a nine-year low of 1.8 per cent in October reported by the ODPM adds to the recent evidence that house prices have firmed to a limited degree recently amid stronger housing market activity and increased buyer interest.

If house prices start to accelerate markedly, we believe buyer interest will diminish, thereby keeping a lid on prices.

The limited correction in the Halifax house price index in January following the marked rises during the latter months of 2005 reinforces our strong doubts that house prices will see sustained sharp rises over the coming months.